Question

Kyle, Inc., owns 75 percent of CRT Company. During the current year, CRT reported net income of $400,000 but paid a total cash dividend of only $56,000. What deferred income tax liability must be recognized in the consolidated balance sheet? Assume the tax rate is 21 percent.

Multiple Choice

• $22,803.

• $26,043.

• $18,963.

• $42,003.

Answer 1

· Kyle,Inc 's share of CRT company = ($400,000× 75%)

= $300,000

· dividend revenue is = ($56,000× 75%),

= $42,000

· If the ownership level is less than 80% then parent company has to pay tax on 20% of the dividend and the 80% of dividend is not taxable

80% deduction(Non- taxable income), Undistributed income of Kyle

($300,000- $42,000 = $258,000)

=80% × $258000

= $206,400

Taxable income =20% × $258000

= $51,600

Hence,the future taxable incomeof $51,600 will become taxable later, when the expected tax rate is 21%. Therefore, the deferred tax liability is =21% ×$51,600

=$10,836.   

CRT Net income	$400,000
Less: dividend paid	$(56,000)
Undistributed income	$344,000
Share of Kyle, Inc. ($344,000× 75%)	$258,000
Less: Non taxable portion ($258,000×80%)	$206,400
Taxable income	51600
Tax rate	21%
deferred income tax liability ($51600*21%)	$10836

CRT Net income	$400,000
Less: dividend paid	$(56,000)
Undistributed income	$344,000
Share of Kyle, Inc. ($344,000× 75%)	$258,000
Less: Non taxable portion ($258,000×80%)	$206,400
Taxable income	51600
Tax rate	21%
deferred income tax liability ($51600*21%)	$10836

Note : Please check if amounts provided above are correct.